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A timely exercise by global exchange services & trading technology firm in the light of regulatory push for greater transparency

Market participants in the institutional FX sector’s most populous regions have experienced comprehensive regulatory overhauls during the last year, spearheaded by the implementation of the Dodd-Frank Act which stipulated that over the counter derivatives including FX should be subject to greater transparency, thus ensuring that all companies operating in the United States establish a full method of reporting trades in order for regulatory officials to be able to establish how prices were calculated, and a full set of statistics for any specific trade cycle can be proven.

The nature of providing over-the-counter trading on a large scale had led to the inclusion of the stringent trade reporting rules which the Dodd-Frank laid out, and is being emulated by the European Commission in the implementation of EMIR and MiFID II this year, with Singaporean authorities following suit shortly afterwards.

One means of providing very transparent trading environment would be to conduct all transactions via an exchange, as in traditional stock and equities markets, which is exactly what is being considered by NASDAQ OMX, according to a report yesterday by Reuters.

For large financial institutions, such a move would go some way toward putting paid to the possibility of having the metaphorical finger pointed at them for alleged rate fixing, and would negate the necessity for central counterparties and extensive reporting to repositories, as regulatory officials could conduct compliance inspections by viewing the price and execution method on the exchange or central clearing house itself.

NASDAQ OMX would not stand alone in this methodology, but rather would enter into competition with Chicago Mercantile Exchange (CME.O) and Chicago-based peer IntercontinentalExchange (ICE.N), both of which currently clear FX order flow, and are likely to be joined in competition by Deutsche Boerse’s (DB1Gn.DE) Eurex Exchange in the near future.

Speaking to Reuters yesterday, Hans-Ole Jochumsen, a senior company executive at NASDAQ OMX concurred that the move toward exchange-based FX trading has been heavily influenced by international investigations into a large number of the world’s largest banks regarding the fixing of FX rates, a practice that would not be possible if order flow was processed via an exchange.

“More and more people are talking about it being worthwhile to have products traded on a more transparent route,” he told Reuters. “There are some players who are tired of being bashed by regulators and politicians all the time, so I don’t think they want any more trouble.”

Mr. Jochumsen said this, coupled with Basel III banking regulations that will increase capital requirements for some, typically longer-dated, foreign exchange contracts, and European Union rules on mandatory clearing of derivatives, had presented an “exciting” opportunity to expand into FX.

According to Mr. Jochumsen, consideration within the firm is being given toward the possibility of providing trading and clearing of both spot FX and derivatives, with a decision expected to be made before this summer as to whether to proceed.

“Customers are really interested in discussing what to do in the FX space. Our trading and clearing systems are pretty prepared for this. If we see a strong need, we are able to move pretty fast,” he said.

Whilst explaining the proposed move to Reuters, Mr. Jochumsen further added that future NASDAQ FX business would possibly commence with the clearing of around 80 large currency crosses. The company is also looking at pairing up with banks to offer clearing services for their internalized FX services.

“It’s a different set up, but something some of the banks are pretty interested in discussing. If they can do that (clear some FX transactions) without changing the business model they have, they will like that,” concluded Mr. Jochumsen.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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